Inflation wars (cont'd)

"As I am fond of pointing out, the workers of the United Kingdom did not wake up one morning in October 2008 and find that their left arms had fallen off and half of their offices had disappeared."
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Some of us did decide that we no longer wanted to be part of it all. When starvation beckons I may have to rejoin the rat-race. Are there more like me out there?

Estate Agents seem far removed from the wealth generation that Stephanie is suggesting that we need, a very bad example. Back to more and more services???

Well all that inflation isn’t being generated by wages:

Retail price index (all items) RP02:
Jan 2009 210.1
Sept 2010 225.3
Price inflation = + 7.2%

For the average working Joe or Jane:
Jan 2009 Average weekly earnings = £444
Sept 2010 Average weekly earnings = £443
Increase = – 0.002%

So if it isn't wages what is it?
Could it be Mr King's QE:
Overall price level = (Amount of money x speed of transaction [usually but not always reasonably constant]) / (Supply of all available items to purchase)

It's Christmas - they're both right. It's just a matter of timing.

1. At 5:24pm on 16 Dec 2010, Kit Green wrote:
"Estate Agents seem far removed from the wealth generation that Stephanie is suggesting that we need, a very bad example. Back to more and more services?"
That's the UK these days - all talk and no do.

Has Mr Posen learnt anything? The ONLY thing that the UK has is capacity. Until that capacity is organised to become productive it matters very little what he does with interest rates.

We have the lowest histroical interest rates at present and that is not excieting either investment or demand. The tag of 'ninny' should be attached to him as he really does not understand what he is actually looking at!

Monetary Policy Committee = Big non funny Joke

What a pair of goons ... totally useless the both of them ... one of them at least should get the next flight to New England.

Looking for the big fiscal fix all the time when the real problem is that the UK does not make enough of anything that anyone wants to buy or otherwise consume.

It really is time to bin the MPC and replace it with something looking at the entire UK and wider economy and be looking at something other than GDP.

When two goons like this argue and enither of them makes any sense ... we should all know that major changes are needed ... the UK urgently needs some kind of new think tank that is independent and so that the dialogue can address all of the nation's issues and not just the machinations of fiscal policy.

I heard one goon yesterday saying that when the MPC considers inflation policy ... it is looking two years ahead ... can you imagine these goons pontificating about two years ahead ... what an abosulute farce.

Neither of these goons seem to understand that a nation's currency is only as good as what a country can make, mine grow or fix ... that is why some third world countries are so poor and why Britain is in serious decline ... countries are in recession too when their economic production does not match i.e. is insufficeent to match its spending and consumption ... too much money supply and not enough resources to back the currency.

These useless goons must do something to kickstart British domestic industry ... or resign.

Resign! Resign! Resign!

Price rises have been too high for too long to believe anything other than that we are seeing genuine rise in inflation. Its not coming from wages or benefits handed out by the government though. Some raw materials are going up significantly; in my mind this is due to the QE money needing to be gainfully invested. QE isn't achieving greater bank lending, nor can I believe there is greater bank security, because we now all know that the government will step in to save any bank. So stop QE and lets see if inflation declines.

Unless you know differently of course ................
Love to hear from you and your thoughts ..............

I'm curious to know, isn't the MPCs brief to keep a lid on inflation, regardless of what the cause is? I'd go with the explanation suggested at the end of the article, ie. Stagflation - caused by vast resources spent on maintaining capacity, even when everyone knows this capacity is in the wrong places.

The money is in houses, and the jobs are in the public sector rather than export earning industries. Creative destruction needs to be allowed to happen.

Lower exchange rates don't work if that sets off a price/wage spiral that eventually raises domestic prices and cancels out the competitive price advantage internationally. The UK workforce needs to get cheaper in export price terms if it is ever going to trade itself out of this mess. Unfortunately that means living with spare capacity until that capacity can be gainfully employed in export earning industries.

What a waste of time all this arguing has been about a few pounds here and there because of a VAT ibcrease.

INFLATION is the biggest threat to all of us and it is now about to go out of control.

Our savings our salaries pensions petrol gas and just about everything we import will cost not just us a few pounds but humfreds of pounds as the US prints more money and the price of the dollar falls and pushes up prices of all essential commodities that we import.

Not only that but it also pushes up inflation in the East so just about everthing else we buy that is imported has to increase in cost.

The BOE have given up because they have decided that the risk of higher mortgage rates and repossessions is more detrimental to the country than driving us all into poverty as the value of everthing we earn and save is worth less and everything we buy costs us more.

Is that Catch 22 or just a stupid political short term manouvre to save the banks from having to writedown too many assets?

As Cicero would say: Qui Buno?

Rock & Hard Place times,
So we all have to bet one way. For me I vote for a low interest rate plus tight pay controls, spending cuts, directed investment, managed immigration, tarifs if required, low student fees, a sense of community and country, NO more QE (= deferred inflation - mainly for our kids), and a way of helping the next generation.
If you think differently the floor (literally) is yours.

Ms Flander's wrote:
'In a future post I'll contemplate the depressing possibility that they are both right: that we do have a great deal of spare capacity in the economy'

We probably do have spare capacity, but do we have spare demand.
Because to have spare demand, we need to have spare money to spend on our spare demand.

Now to get the spare money, we have to borrow it into existence.
But UK households have only increased their indebtedness by 0.8% over the last 12 months.

Spare demand needs spare money
Spare money is generated by spare capacity for debt

Perhaps the spare capacity for debt is the issue.

You say that 'our prices are being set to a large extent by China, India and the rest'. BUT this is precisely the point. Over the last 15 years the so called Brown miracle was due to ever lower prices from these self same countries that enabled us to borrow money that we couldn't pay back without rising inflation.

Now the reverse is true and we have to manage the downside of the bonanza. I own a few manufacturing businesses and I am seeing inflationary increases at every turn - I've never seen it before! All I have ever seen is lower prices - driven from cheap imports. I think that inflation has only just started and we should smell the coffee to understand what is happening.

This country of ours is getting poorer and the east is getting richer. Meaning lower real wages and lower asset prices (read property). Printing money will pump inflation and make the day of reckoning even more miserable.

Merry Christmas - PS Manufacturing in this country is now booming - may the sterling exchange rate go for ever lower.

Quoting Steve Keen verbatim:
The credit impulse
The fact that aggregate demand is the sum of GDP plus the change in debt means that the change in aggregate demand is the sum of the change in GDP plus the acceleration of debt. Just as the debt contribution to demand is highly correlated with the level of employment, the acceleration of debt—or the credit impulse, which is defined as the change in the change in debt divided by GDP (Michael Biggs et al., 2010)—is highly correlated with the change in employment.

In stark contrast to the assumption made by Bernanke and most neoclassical economists—that debt only has macroeconomic implications if the distribution of debt affects consumption (to cite a recent paper by Krugman, “It follows that the level of debt matters only if the distribution of that debt matters, if highly indebted players face different constraints from players with low debt”, Gauti B. Eggertsson and Paul Krugman, 2010, p. 3)—the sheer scale of debt, its rate of change, and whether it is accelerating or decelerating, have very significant impacts on the macroeconomy. If Bernanke, Krugman and other neoclassicals were correct, the correlations between the acceleration in debt and the change in unemployment should be insignificant.

Instead, the correlation is highly significant, large, persistent, and causal, since it leads changes in employment and GDP by about 3 months. The correlation during the Great Depression was -0.72; over the whole post-WWII period from 1955 the correlation was -0.59, and since 1990 it was -0.82 (see Figure 31).

from here:
https://www.debtdeflation.com/blogs/2010/11/30/competition-is-not-a-panacea-in-banking/

Looks to me that someone doesn't know the difference between "utilisation", "efficiency" and "productivity" when they talk about spare capacity.

For example - if you run a widget machine for a full 24 hours a day, but make only scrap...... you have 100% utilisation, but zero productivity.

The same principles apply to non-manufacturing businesses but may be harder to measure. Airlines can do it. My guess is estate agents have never tried.

I agree with Mr Posen. The crisis was not caused by a sudden change in Utilisation or Productivity.

My problem with the men in grey suits is that they know very well what caused all this but insist on trying to fix the effects rather than the causes.

Trying to stimulate demand by low interest rates or QE won't work because T C Mits knows the financial crisis is not finished. We're all expecting more trouble in Spain, for example. It's safer to spend less and borrow less.

Low Interest rates and QE only helps the banks to rebuild their fortunes and stoke inflation.

This will only be fixed by wholesale total reform of the global banking and monetary systems - and that's a very long way off.

Everyone seems to be mesmerized by 'forecasts'. No matter who says what, we seem to accept it. We take published statistics at face value and then debate them in earnest.

When you think of it, this really is a load of nonsense!

These opinions are nothing more than guesses. The people who offer these pearls of wisdom have no more idea about what's going on than you are I!

By all means listen to them but please, trust your own judgement. Your living the reality - not the model.

Prices are certainly set by China for some of us keeping ahead of inflation by buying directly from Chinese suppliers.
A practice no doubt used by many, the internet is very useful in allowing the ordiary citizen the ability to buy goods at far lower prices directly from abroad.
This country is making both the Chinese and Indians wealthier but does the cash ever return? course not, its paying for property at home.

Chris B @ 7..

The money is in houses, and the jobs are in the public sector rather than export earning industries. Creative destruction needs to be allowed to happen.

Lower exchange rates don't work if that sets off a price/wage spiral that eventually raises domestic prices and cancels out the competitive price advantage internationally. The UK workforce needs to get cheaper in export price terms if it is ever going to trade itself out of this mess. Unfortunately that means living with spare capacity until that capacity can be gainfully employed in export earning industries.
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The main consequence of your argument is that this situation requires coordination of monetary and fiscal policy, something that our system prevents. According to your logic, interest rates should go up to force defaults by bad debtors. But this is going to create a social crisis in housing therefore it would need to be coordinated with housing policy. Social housing would have to be built and some of the glut of auction properties would have to be bought by the government for renovation. This would also force substantial reductions in house prices which would get the property market moving and reduce living costs. All of this would get the debt burden off our workforce.

I also believe we're heading down the stagflation route but neither the government nor the bank of england are dextrous enough to handle it. Capacity is not analagous to gain therefore the monetary lever arguments are inadequate. We have lost construction capacity recently and manufacturing capacity over the long term but we have capacity in IT, banking and estate agents. We are becoming the Golgafrincham Ark Ship B.

As a simple accountant with I note the arguments about inflation do not seem to distinguish between
- cost push - what we have now, which can only be reduced by stronger exchange rates (which are bad for British manufacturers)

- demand pull - and this is what interest rates can influence by cooling the economy

If its pretty much all cost push then its right to keep interest rates low to stimulate demand albeit it keeps the currency subdued - which in the long term surely has to be better.

The estate agent example is obviously simplistic and unrepresentative as no consideration is given to defining capacity or understanding the variety of definitions between industries. In the area where we would expect to sell abroad or substitute imports it is likely to be specialised, high skill and technology driven. After cutting investment, sacking staff and possibly mothballing facilities it will be quite an effort to expand if you have the finance to prime the expansion. The question is not whether the economy can grow but by how much will activity lag behind demand and therefore how much potential business will UK lose or cede to others.

The BOE looks and says OK inflation is running at X% now. But, they say, everything will be fine when all these current inflationary pressures have worked their way through the system. Inflation will come down.

But when inflation eventually goes down to Y%, prices have still risen by X%. So people still can't afford the new prices even if inflation itself has gone town to Y%.

So we can't have price inflation (without some wage rises at least).

And now HMG want another tax on electricity to pay for more electricity. They still think they can bleed more blood out of us.

To 18. At 8:11pm on 16 Dec 2010, cynicalaccountant

Overall price level = (Amount of money x speed of transaction [usually but not always reasonably constant]) / (Supply of all available items to purchase)

Oh how we earn an awful fate, when first we practice to inflate.

‘QUANTITATIVE EASING’, a benign description of the malignant?

#14 The-itinerant-ex-pat

+1

Watriller, in part, seems to think that some of our problems will be solved by 'specialised, high skill and technology'.

I don't know if you have been to China or India but their core 'working' workforce is better educated than ours. They have fully qualified doctors working in call centres!

Their business managers/entrepreneurs are at least as well educated as ours - especially in the core subjects of science and maths. Let's not delude ourselves in thinking that we are better or more clever than they are. The quality is the same - it comes down to cost.

WHy are prices set by Indians if the Indians have a trade deficit?

When it comes to software, the general impression is that total costs are as high as if it was done locally, just they could offer capacity.

"After all, the MPC has been wildly wrong in its forecasts of inflation over the past two years - it could easily be wrong about the next two years as well."

Actually they have been wildly wrong for about ten years. Somehow asset price inflation, such as house prices, completely skipped their thoughts and minds. Maybe this was a directive from Gordon Brown but it meant that an inevitable boom and bust occurred making the UK economic crisis worse than in other countries. Only the merciful fact that we had not joined the Euro gave us the elbow room to devalue our currency and print money like there was no tomorrow. But when tomorrow comes it will mean that our children will have to pay dearly for them being so wildly wrong for so long. And the seeds of inflation as a result of this emergency remedy are already sprouting.

As regards Sentance and Posen, and for that matter all the other economists, ‘economics’ has nothing to do with it, it’s a mathematical issue.

Under normal circumstances the threat of people defaulting on debt was enough to limit the extension of credit to those very likely to repay it.

However between 1997 and 2007 lending money to people who were unlikely to repay it became common practice.

Creating money against a ‘promise to pay’ works well providing that the creator suffers the loss if the promise to pay is no good, as this naturally limits the amount of money that can be created.

Unfortunately banks went past this point. And as a consequence were insolvent.

Faced with the likes of RBS & HBOS collapsing, which in turn would have likely taken down many others, bailing them out was the only sensible course of action.

If the banks had collapsed then money held on deposit to pay peoples wages etc. would have gone with them.

And if people weren’t paid their wages, they wouldn’t have gone to work, and the country would’ve collapsed into anarchy.

But bailing the banks out is inherently flawed.
Because you have to bail them out with money.
And all money is created as debt.
Therefore more debt has to be created to bail the banks out.
And the excessive creation of debt caused the collapse in the first place.

So the BOE decided (rightly in my view) to print money and in essence give it the Government (who had bailed out the banks), to prevent the Government falling into a compound debt trap.

Mervyn King saw the problem coming before most (all credit to him).
However the gravity of the problem is such that the £200bn he’s printed isn’t anywhere near enough.

Which leaves him with a rather interesting dilemma.

Either he watches as the country collapses under the weight of its debt, which is still far too high, or prints a lot more money.

Now eroding the value of the currency by printing more of it, would seem at first thought to be the other dilemma, but I don’t reckon it is.

The value of a currency used to be backed by a measured amount of gold or silver for which it could be exchanged. Not so any more.

The value of a currency is based on the common sense and fiscal discipline of its issuing government. Remove that and you risk removing its value.

So all the ‘economists’ currently resident in the world can postulate all they want, the issue ultimately turns on the likely consequence of ‘printing more money’.

At what point is faith lost in those ‘notes’ in our wallets and those figures printed on our bank statements?

See link below for a better explanation than I can give:
https://www.positivemoney.org.uk/

The long run means people have to be poorer in the Uk...and we are working through that now.

House prices wil have to fall--the longer the policy of denial continues the more faith in the currency is slowly eroded. The chatter from investment experts hasn't convinced most people for years....the lack of action serves to discourage them.

We largely got away with Inflation in the late 80's and hopefully we will again...hopefully.

There are two sorts of people in this country: On one hand there's the same old sort of people who are the architects of the financial crisis, who now want to inflate away saver's cash for the sake of the bonus bankers and the credit junkies. They essentially advocate a return to Gordon Brown's Ponzy Scheme Economy. Such people will alway say no to interest rate rises and want the state to print money until we're drowning in it. The other sort of people want change. They want those to pay for the clean-up of the finance bubble mess who created it and return to a sustainable productive economy.

Om "spare capacity", Kit Green @ 1# has it right about estate agents and services generally. The example given has the service provider ready to service any increased demand - but in no position to stimulate demand by, for example, lowering prices. What are they going to do - offer a buy one get one free offer?

The mechanism suggested for spare capacity to lead to regeneration is that that capacity can be used to produce at a reduced marginal cost/price. This works for factories but not, I suggest, services. For a lot of service providers the natural first reaction to a reduction in business would be to increase prices so that the remaining business covers costs. If this doesn't happen then they probably stop.

I suggest that the confusion over this effect in the UK data (on this spare-capacity point and on import/export effects) is because people are using an outdated theory and a model where the economy is largely manufacturing-based. The idea that services necessarily follow the same pattern - or that all services are the same and conform to a second pattern is unsubstantiate.

8. At 7:09pm on 16 Dec 2010, virtualsilverlady wrote:
What a waste of time all this arguing has been about a few pounds here and there because of a VAT ibcrease.
INFLATION is the biggest threat to all of us and it is now about to go out of control."

If inflation is the greatest danger to the economy,is it not the case that a rise in VAT will contribute? VAT is tax on consumption and will increase the cost of living index,whether this is CPI or RPI.

28. At 9:01pm on 16 Dec 2010, markus_uk wrote:
"There are two sorts of people in this country: On one hand there's the same old sort of people who are the architects of the financial crisis, who now want to inflate away saver's cash for the sake of the bonus bankers and the credit junkies. They essentially advocate a return to Gordon Brown's Ponzy Scheme Economy. Such people will alway say no to interest rate rises and want the state to print money until we're drowning in it. The other sort of people want change. They want those to pay for the clean-up of the finance bubble mess who created it and return to a sustainable productive economy."

If it is your view that Mr.Brown was either directly or indirectly responsible for the banking crisis and the collapse of private capital,how would you account for bank failure in the U.S.A.,Japan,Germany,France,Spain,Italy and the European fringe?His malevolence clearly knows no bounds.

What people of your cast of mind find it hard to accept is that government debt across the world is a response to the collapse of private capital, for which its proprietors and agents are responsible,no-one else.In a capitalist economy,regulation is always light touch and arms length.Bank`s traded toxic assets which they didn`t understand,the profit was their,while it lasted,so is the responsibility.

The lower the value added the higher the spare capacity. The higher the value added the the greater the specialist skill and the more difficult it is to find spare capacity.

BTW Estate agents add little value. In fact the whole basis of paying an estate agent a fixed percentage on a transaction is highly dubious. Consider a 200K house. Any muppet can sell it for 150K so why pay any percentage at all on the first 150K. In fact this shows itself as a problem as the sale progresses. The nearer the sale appears to move to some conclusion the more the estate agent appears to want to act for the buyer and less for the person paying them, the seller. A 20K drop in price can have a huge effect on the equity released but little effect on the income to the estate agent. I once had the pleasure of interviewing an estate agent for a job. I had to tell him he had been gazumped for it. Shame.

The problem is not spare capacity for most people, it is spare money.

You would expect Mervyn King to be making far more noise about rising inflation, but he`s not because it suits the bank`s and the government`s agenda by cutting the value of what they owe.Fixed interest bonds which embody government debt decline in value,so do public sector pensions which have been frozen,retirement pensions until payments are linked to RPI,the bills for the NHS,welfare payments including child benefit,tax credits,disability benefits and much else besides.

Inflation involves a huge transfer of assets from people to government as the population at large,especially the poor,pay the costs of bank failure, while its proprietors and agents grow high on the hog.

This will automatically reduce the deficit and shrink the state! No wonder they`re all keeping quiet about it.

J Dempster

You cannot dillute the pound too much or people who have bought bonds in pounds and who you want to buy more bonds in pounds will not be happy. Most bonds are evidently bought by the chaps who ship all that tat and rubbish to us that good ol' Joe Public loves to buy. Clever stuff eh. Ship the tat and then lend them the money you make from doing it. Chinese takeaway anyone?

8585 good posts.

This talk about spare capacity is futile. We have shed loads of spare capacity. It goes with the fact that we can't generally compete with the price of goods manufactured in the Far East or the quality of goods manufactured in Germany or Japan or the US ( I say generally because there are some notable but relatively small exceptions).

We have, as 8585 said, only had low inflation because we progressively outsourced to lower cost economies. This cost benefit is now fully utilised and so we will have inflation back. However, it will be massive compared to what we have had before because of the impossible situation we will find ourselves in vis a vis rising commodity and food prices.

Lending is subdued not only because the banks are bust (but still find cash to pay bonuses to wealth parasites) but also because lenders are starting to realise that future earnings of their customers are not likely to be able to meet repayments and interest in most cases.

21. At 8:36pm on 16 Dec 2010, Dempster wrote:
"Oh how we earn an awful fate, when first we practice to inflate."

I like it. I'll use that one if I may...

At least the MPC seem to recognise how truly mind-boggling incompetent they have been for the last decade. Far too little far too late!

What this MPC 'debate' shows is how very bad the economics education of these people has been and how very poor our selection criteria have been in recent years.

There is no way froward without a thorough clean out of the Augean Stables that is occupied by the Fools of Threadneedle Street - they all have to go!

You cannot run an economy without money having a rational positive price - it has never been possible to do so in the past and it is not possible to do so today. All other economic policy measure cease to work if money is worthless (as it has deliberately been allowed to become).

QE has been spent on the wrong things and the price of money (i.e. interest rates) have become so low that it(The Bank) has already collapsed 300 odd years of the Bank of England 'prudential' management. When the Bank started it paid 8% on debt - now they pay the nugatory price of 0.5% One sixteenth of the original rate and on fifth of the previous lowerst rate. These figure describe more graphically and more fundamentally just how idiotic the Bank has become - and they also provide the reason why all those involved at the Bank, FSA and HM Treasury have to go BEFORE the country can hope to get to the foothills of a recovery.

bryhers @ #31

+1 +1 +1

Inflation?

I tell you now what's going to happen to the UK:

Things are going to keep getting more and more expensive. And it doesn't matter what the price in numbers is going to look like.

This round of extremist neoliberalism in the guise of Con-LibDem is misinformed and misguided. Their economic policy is a shot in the dark by blind men standing on a hilltop that is today only historically significant.

26. At 8:56pm on 16 Dec 2010, Dempster wrote:

The truth, the future.

Over the past few years you have managed to get to the bottom (I would say top) of the problem.

Thank you for doing the research and feeding back.

AverageJoe has done similar sterling work in a remarkable short amount of time.

I would like to thank you both for delivering the 'news' and possible ways forward.

Keep up the good work

And finally...the only out for the UK is to stop playing like a USA lapdog.

Nobody really wants that so why the UK elite keep trying to ram that down British throats I do not know.

What the UK needs is to align itself with Europe. Europe is a rising star of the world. The USA is a failed empire. The UK has nothing to do with it. The UK needs to learn to ski, eat good food, and sleep with good women. The UK does not need obesity, arrogance and consumerism.

The UK must end its pro-US alliance and fully integrate with Europe. If this means abandoning the good old Pound, then never mind, you've done it before when you went from Pound Shilling and Pence to the nice new European metric system.

36. At 10:07pm on 16 Dec 2010, Remantled wrote:
21. At 8:36pm on 16 Dec 2010, Dempster wrote:
"Oh how we earn an awful fate, when first we practice to inflate."

I like it. I'll use that one if I may...


Feel free, but it's not mine.
The dying of money (Jens O.Parsons) if I remember correctly.

In a future post I'll contemplate the depressing possibility that they are both right: that we do have a great deal of spare capacity in the economy, but that isn't going to bring down inflation as the Bank expects, because our prices are being set to a large extent by China, India and the rest.

I struggle to see why you doubt this. Maybe you just cannot shake free of all those hours of studying text books written before the rising of the East? ;) Had we even started the massive off-shoring of so much manufacturing and even white-collar work when the majority of economic theories were written?

Over the next few years I would summarize what will happen as:
1) Rising fuel and food costs cause a drop in discretionary spending of all those on medium to low incomes.
2) Massive drop in sales on big-ticket items that have been previously been just about affordable by the aspiring working class... new kitchens, holidays, cars, houses.
3) No impact at all on the lifestyle of higher income or dual medium income families in stable job environments, who "have never had it so good".

As a result, instead of the drop in sales causing the "big ticket" items to suffer "deflation" (according to normal economic theory), instead the market will change to become focused at the higher spending end of the market, and products will just disappear (rather than be cheaper) at the lower end. There will become a much larger gap between the "haves" and "have nots".

So the issue for the government and the BofE is... who are your policies for?

34. At 10:01pm on 16 Dec 2010, Not Buzz Windrip wrote:
J Dempster

'You cannot dillute the pound too much or people who have bought bonds in pounds and who you want to buy more bonds in pounds will not be happy'

But who bought them?
Our pension funds?
To fund the annuities?
What do they care?

They'll levy their charges anyway.

Dempster

However between 1997 and 2007 lending money to people who were unlikely to repay it became common practice.,

Why . Exactly?

A while back Ms Flanders wrote about passing on a mountain of debt to the younger generation. I don’t think I picked up on it much at the time.

And because I’m a husband and father of three, of all the issues which currently raise my bile, it’s this:

What in God’s sweet mother earth is the point of having a financial system that is guaranteed to give the younger generation a mountain of debt to climb, when they should be setting out on a level playing field.

And for the avoidance of doubt, from others I speak to, they think the same. So it can’t just be me.

Do these professional economists really believe in all this nonsense about "spare capacity" determining inflation rates?

Inflation is just a time-varying multiplicative transform on the pricing system. In other words it can exist and change independantly of any external influence, though of course rates can also respond to other changes in the economy like labour shortages.

The truth is that our economy has become so imperfect and dominated by monopolies/oligopolies that you can't expect monetary theory to determine price levels anyway. Why are prices going up now? As other posters have pointed out, it's not because of wage demands as wages are hardly rising at all. It's more because lack of competition is allowing companies to increase their margins, and I suppose the lack of competition may be related to a shortage of new entrants into various markets because of the difficulty of getting finance to start them up.

There should be a lot more effort going into increasing competition. Most markets are now dominated by two, three or four mega-companies. The reality is that this doesn't create enough competition, even without deliberate price fixing.

8585 #12

"BUT this is precisely the point. Over the last 15 years the so called Brown miracle was due to ever lower prices from these self same countries that enabled us to borrow money that we couldn't pay back without rising inflation."

Yes - we imported deflation, whilst at the same time not including house prices into inflation calculations.

BTW - we also off-shored pollution, so we shouldn't be a smug about that either.

To 40. At 10:24pm on 16 Dec 2010, Remantled:

Thank you

#43 Jonearle

Good guess, but too optimistic. The same logic really always applies. There will always be the Haves, but how many? In a population of 60million, 300 hundred Haves don't really count.

So things will flow to the top, and then the next year they'll flow to the top of the top and so on.

Where's your limit?

45. At 10:41pm on 16 Dec 2010, Oblivion wrote:
Dempster
However between 1997 and 2007 lending money to people who were unlikely to repay it became common practice.,
Why . Exactly?

Fair question O.B.

My personal experience was this:
If you were, a ‘financial adviser’, then the more mortgages you sell,
the more you were paid.

If you are a ‘bank business manager’, the more ‘products’ (loans) you sell the more you were paid.

The mortgage and loans business was (and may still be) commission driven.

The standard of underwriting was diabolical, and even diabolical fails to truly describe it.

Not Buzz Windrip:

"A 20K drop in price can have a huge effect on the equity released but little effect on the income to the estate agent. "

IIRC Freakanomics (or was it Radio 4 More or Less??) did a piece on the gap between the asking price achieved by an estate agent selling their own home vs someone else's. Overall I didn't like the book but still thought this was worth a quick mention.

watriler @19

In the area where we would expect to sell abroad or substitute imports it is likely to be specialised, high skill and technology driven. After cutting investment, sacking staff and possibly mothballing facilities it will be quite an effort to expand if you have the finance to prime the expansion.
---------------------------------------------------

This is the high tech manufacturing model. There is no capacity for growth in this sector but it's likely to remain strong. The reason that it will remain strong is that manufacturing has suffered incredibly harsh conditions over the 2nd half of the 20th century and the companies that have survived or grown in this climate are very strong companies. This isn't a model for the economy though.

The issue of government investment is key to understanding the problems that manufacturing faces. The BBC is a good example of government investment creating a climate where the private sector can thrive. The fact that the BBC exists allows private sector media firms to use the creative and technical talent of a large media sector. If the BBC didn't exist then the media sector would be in the same situation as manufacturing. There would be no talent pool to draw on.

In the 80s there was a sea change in attitude to government investment and it was considered that all government investment must inevitably end up like British Leyland. There are many examples where this wasn't the case but reality was ignored in favour of lazy thinking and then lazy thinking became ideology.

UK investment in traditional manufacturing over the last 20 years has tended to come from abroad. The UK has had an investment problem for a long time now which came to a head in the fire sale of the 80s.

We cannot have an economy of highly specialised high tech manufacturing without a broader talent pool of technical people. Coupled with that are the problems of investment and the high level of capital investment that manufacturing requires to grow. Therefore there is no spare capacity in manufacturing.

We do, however, have a massive pool of talented IT people but IT has seen little investment since investors got their fingers burnt in the dot com bubble.

47. At 10:45pm on 16 Dec 2010, random_thought wrote:
Do these professional economists really believe in all this nonsense about "spare capacity" determining inflation rates?

Might it not be the case that if you increase the quantity of money into an economy without increasing the amount of goods,the effect of QE will be on prices?

QE has been a very blunt instrument,it has cheapened the cost of money so interest rates have stayed low,but it has not stumulated demand through its intermediary aim of increasing credit.

Other inflationary factors are the cheapening of the pound relative to other currencies which makes imports more expensive and the rising price of some commodities,especially gas,oil,minerals and wheat.

Inflation is a bonus for the government because it reduces the value of its debt,and transfers purchasing power from consumer to government through cuts in the value of pensions,the NHS and welfare payments.At the same time wage rates are static because unemployment drives down the cost of labour.

This results in falling consumption as wages and welfare payments fall.So the government is riding a tiger,if the currency loses too much value,demand in the economy will fall,tax revenues reduce and the deficit increase.It`s a hard call,one or two mavericks on the MPC are asking for a rate rise.We`ll see!

The issue to which I am often drawn (predominantly because I’m a father of three) is this:

‘The purpose of life is to facilitate or create more life’
This statement is absolute and cannot be denied.

And the creation of money as debt has been recently used without aforethought, and the end product is likely to be debt slavery for a significant proportion of the next generation.

The next generation being those you see queuing at the school bus stop in the morning.

Perhaps banks should have known better
Perhaps government should have known better
But we have led them to believe we do know better
Which prompts the question: Do we?

#46 Dempster

It not just you: and what you say is absolutely the point

As another husband and father of three, I saw from my parents and have always believed that the role of each generation is to pass the baton on to the next and give them the best possible chance to do likewise.

Somewhere during my lifetime, this has ceased to be the norm. Too many people seem to believe that they can have it all with out any thought for their children. What is their legacy and the children's inheritance? Houses they can't afford (the equity in which will be used to pay for our care when we refuse to die): a sequence of short term insecure jobs and educational opportunities because all the good jobs are already taken (and will stay taken because we won't retire): and a mountain of debt.

I do wonder whether, and almost hope that, the tuition fees issue galvanises young people to protest: while fearing the anarchy that could be unleashed. But then, the future is theirs.

The first thing to do is to understand how economics is currently working as a system. The reality is that it's not working. Describing economics as a system can only be possible using very broad models and I hate talking in models. I like examples because examples are real.

But with that disclaimer out of the way, I say reduce the gain by raising interest rates. If a control system is broken then slowly reducing the gain is not as good as fixing it but better than ramping it up and causing a violent explosion. I say raise interest rates very slowly with a clear message that it's going to be a long term trend. Otherwise there's a risk of catastrophic currency collapse and who knows where it's going to happen. I personally think that USD is a bigger risk than the Euro but it could be us. It's not that quantitive easing is wrong in principle. It's wrong in practice because of where the money would go. It's not how monetary policy would work in theory that's important, it's how it would work in the current economy. The bank of england doesn't have a lot of options at the moment so it has to choose the least worst option. It could have acted robustly in the mid 90s with very little risk but it didn't.

OK I have read all the posts and agree in part with most but I shall throw this into the pond for what it is worth.

Madam Flanders thanks for the link to Mr Posen’s speech which I would otherwise have missed. For any interested the BoE site has two good speeches by Messrs Bean and Fisher, archived, explaining QE : they both state unequivocally that QE is inflationary and intended to be so.

As for Mr Posen, he starts well by admitting that the BoE forecasts for inflation were wrong but that they don’t know why their forecasts were wrong. But nevertheless he continues to think that their forecasts will be right in future. Good tea leaves stuff and Bravo for chutzpah. But he takes the prize for jumping into the same boat as the US forecasters’ (the getting-it-wrong boat) without realizing that the drivers for the US economy are markedly different from the UK’s (the US reasons for getting it wrong are different) : as indeed they are for Japan another of his targets and a favourite for economists who always get Japan wrong.

He then forecasts the inflation rate two years down the track to be “well below” the MPC’s target…..but then again, it may not. Mr Posen is certainly worth reading for clarity and precision. Have a look at footnote 6 on page 5 where he says “I don’t actually bet on football or anything else although my wife and I have lottery tickets.”

For you Brits, this gentleman sits on your MPC.

So, the output gap.

It doesn’t exist (sorry to be so certain Madam Flanders). Maybe it used to, but it doesn’t today. And yes it is different this time mainly because of the rate of change in both consumer tastes and producers’ options for supply as a consequence of technical and scientific change and managerial and organizational improvements. Globalisation makes this rate of change more rapid for the simple reason that there are more people attempting to solve the same problems, or to get ahead with different problems to solve having killed off the laggards, without deadweight legacy infrastructures to worry about. The world changed when India and China solved the famine problem back in the 70s 80s.

This is an important point.

If any country doesn’t keep up then it slides inexorably down the tables and no exchange rate change will help unless you want to manufacture low tech goods and pay wages equivalent to China’s or India’s. No….I thought you wouldn’t.

And equally importantly any attempt to increase domestic demand will result in increased imports from those countries that can, as opposed to the importing country that cant. Your local suppliers will not be able to compete against better quality and cheaper imports.

If a country doesn’t keep up then not only does its capital stock become rapidly redundant but its labour does too, lacking continually renewed skills to compete in the world.

I wouldn’t go so far as to say that annual 100% depreciation rates are now applicable on a big chunk of plant and machinery and managerial and labour skills, but that number is pretty close to the truth and certainly much closer than Mr Posen’s statement that “It is the destruction of human and intellectual as well as physical capital associated with redundancies and business closings that destroys capacity”.

So no output gap, with its associated consequence that deflation is out of the question and inflation is ever present.

As for growth? Forget it for similar reasons.

The rest of Mr Posen’s speech is similarly unfounded. As for the Leigh study I read it at the time and I wouldn’t criticize the lads and lasses at the IMF but this correlation stuff just doesn’t cut the mustard for me.

Not a nice message for the festive season for you Brits nor for my friends in all developed countries.

I also think that the comments (including mine) are getting too bogged down with the detail of the article and not the theme. Why is inflation important? It's because of the cost of doing business in the UK. Therefore the cause of inflation is important but it's also important how it affects the rest of the world. Our relative costs are important when we're considering our competitiveness. If inflation is being driven by fuel (which it partly is) then that's probably affecting all of the countries that aren't selling fuel, and reducing our dependency on fuel can be as effective as managing the cost of fuel.

Then there's the elephant in the room. What were the real inflation figures for the last 15 years when inflation in housing was being ignored?

random_thought @47
Do these professional economists really believe in all this nonsense about "spare capacity" determining inflation rates?
-------------------------------

I agree, assuming a relationship between capacity and supply is wrong given all of the variables and it begs the question what are we supplying to who? I think the assumption of a predominantly internal market is wrong as Stephanie mentions immediately after the quote. Thanks for your post because what it highlights is that, as with any statistics, we need a thorough analysis to understand what inflation figures mean.

#50. Oblivion. So things will flow to the top, and then the next year they'll flow to the top of the top and so on.

Yes, this flow always happens in capitalism. But my point is that a shift is happening that will split our society with far wider gaps between economic groups.

With the loss of so many large employers of manual labour, forever lost to the East, I see little long term hope for the poor and uneducated. Traditionally the mainstream middle-classes would be raided to distribute wealth to the poor. And of course the rich just get richer.

But now the mainstream middle-class simply will not be prepared to finance the poor. The lower end of middle class will descend to prosperity levels more associated with the working class. The richer middle classes (and the South East in general) will increasingly live in a world far removed from the rest of the country. I wouldn't be surprised to see estates starting to have gated access (like in third world cities) as this section of the population increasingly use private solutions for protection/policing.

#45 Oblivion wrote:

Why . Exactly?

in the traditional model of lending, the lender took the risk that the loan might not be repaid and so took due diligence to ensure that only sensible loan agreements were undertaken, this is a slow and expensive methodology which eats into profits (and bonuses) but it is what the boring banks were built on.

A new model of lending was created, one where the loan initiator would sell on the loan as part of a package of performing loans for a fee to a bank, the initiator gets his fee, the bank becomes bigger (by virtue of having more assets in the form of loans) and more profitable (due diligence has been outsourced), bonuses all round.

'what is a performing loan ?' you might ask, the answer became 'a loan where a number of repayments had been made on time' and that was it.

'how many repayments make a good loan ?', this dropped to as little as one or two, with low payments at the start some brokers found that they could make the payments themselves out of the fees that they would earn from selling on the loans.

(money is fungible, no one cared where the repayments come from as long as the loan was being serviced)

The banks realised that they could repackage these performing packages into bigger packages and sell them on (that in all likelihood they were making up any shortfall in the performance of these packages will come out in the wash at some point in the future), no one had to worry as the packages were based on the underlying asset (which due to the rising market now had a greater value than when the original loan was given), the loans appeared to be performing and anyway they were sold with insurance. (what could go wrong ?)

The insurance premiums were low because the packages were rated as 'good'.

The banks became reselling agents, buying in packages, repackaging them and selling them on.

The demand for new loans to be packaged became greater than the availability of good debtors and the loan initiators started to scrabble round looking for ever more business from ever more riskier customers, hard selling 'affordable' mortgages (ie. low startup payments with the promise of a move when the repayments were due to rise) to any T,D or H.

When property assets became too scarce, loans on commodity speculation started, commodity prices rocketed and all those subprime mortgages started turning sour as people made the rational decision to buy food/fuel instead of making this months loan repayment and the whole house of cards started to collapse.

This is not the first time that this scenario has been played out, previously the none performing stuff could be buried in the vault and priced at term (ie 25 years into the future), after the usual asset price correction the assets themselves would start to regain some of their value and they would be brought out and realised.

What was different this time was 'mark to market' (FAS157)


Did I see the problems of the financial system before it crashed ? No.

I did see the commodity speculation happening and knew that it would bring about a correction (recession) but I assumed that it would be localised like all the previous recessions I have experienced.

Did the big players know what was going on ? Not at first but by 2005 they knew full well what they were doing and what the likely consequences would be, they chose to continue, that's what all the mergers were about, the concept of 'too big to fail' was a deliberate stategy of survival.

@57 HtH said ...It's not that quantitive easing is wrong in principle. It's wrong in practice because of where the money would go.......

Perhaps the QE money should have been added to the National Lottery prize fund. That might have got some people spending again. :-)

Given that many manufactured goods and raw materials are imported can't much of our inflation be related to the effective 20%+ devaluation of sterling versus the US dollar and Euro since the end of 2008? In fact a year ago it was nearer 30% but has recovered somewhat in recent times. In pounds we just have to pay significantly more for everything we import.

Domestic sources of inflation are low, mostly due to increased tax and government actions rather than wages although insurance and rent cost pressures are still significant in many parts of the country.

Overall both views can then be to some extent reconcilable but the mid term outcome doesn't become much clearer until we see if the exports vs imports balance really does start to shift.

re #4
Plus the lesson of Japan should be borne in mind. A very different economy, a very different business world and a very different people.

But zero interest rates did them no good for a long, long time.

The national lottery and xfactor etc are all for me symptomatic of a wider issue. Even though the students can't always articulate why they are protesting, especially the younger ones, I believe kids have an intrinsic grasp of their environment. They know social mobility is rock bottom and that you stay in the class you are born in. They know there are no jobs. Although I really dislike the lottery and talent shows, they kids are really one step ahead of me. They understand that this really does represent their best way out. Nobody they know made it big in normal work but some they "know" do via the lottery / talent shows.

I do still believe kids can break out of this situation, but it does seem to be getting harder and harder. Disbanding grammar schools and the recent tuition fee hike all increase the escape velocity required by smart kids from a poor background.

2.5 million unemployed, massive numbers of part-time workers, more shifted onto incapacity benefit. How 'damaged' can they be? All of them have just been dismissed as having no capacity to produce output.

Deflation back on the agenda quite soon.

SF: 'It's fun to read. It may also be right. What is most striking to me about the debate between Messrs Posen and Sentance is how certain they both are. For economists, they leave very little room for doubt, on an issue that has created shedloads of the stuff for everyone else.'

----------------------------------------------------------------------
I'm certain that it doesn't help business to have the uncertainty of a sudden end to artificial interest rates hanging over them. I'm certain that we are making UK funny money funnier. I'm certain that in the UK we are making a bad pensions and savings situation worse. I'm possibly, almost, slightly certain that we are offering UK assets cheap, via borrowed money, to overseas buyers. I'm certain that we are still encouraging a debt/overspend culture. And, finally, I'm certain the Government are terrified of 1) high earners, and 2) collapsing or even causing a gentle decline in property prices. As were Labour, before them.

Whoopee! I'm an Economist. Or not. Maybe. Perhaps I am, sort of. On the other hand .....

Please may I have a Bank of England salary, anyway?

re #64
We ran an average 3% inflation through Labour's time in Government. That was very high for the time, with what was happening in the world economy.

If you look at what we thought was high inflation - 1967 to 1995 - you will see spikes but not a consistent inflationary economy at a time when no negative inflation was on offer.

We have deliberately made our economy less competitive in the last thirteen years.

Mad. Crazy. Daft.

Hey! Let's be careful out there today.

Mr Posen, Like Blanchflower before him, obviously never saw an interest rate that was too low. All that verbiage you quote is pure bluster designed to hide the simple truth.

The economy is shot after 13 years of reckless economic incompetence. The whole 'boom' was only ever perched on a tidal wave of consumer borrowing and government borrowing all under-pinned by a housing boom. Economic 'policy' since then has been geared to a) putting a floor under house prices by slashing interest rates so that anybody who still has a paper-round cn afford the interest payments b) instigating a class war by blaming the (rich) bankers and shielding the public sector from any cuts until after the election c) deliberately stoking inflation to allow everybodies devalued asset (their house) to rise in value to the point where they feel rich enough to borrow more money and start the whole cycle again.

Thing is - everybody knows this is what is happening it's just that for political reasons some pretend they don't. Those are the ons that come out with reams of double-think and obfuscation. Like this Posen chap. We should ignore them. They're not big and they're not clever.

BobRocket and Dempster

Regarding the ever increasing lending. According to the reading I have been doing that all started in the USA when that country switched from having a budget deficit and a trade deficit to reducing the budget deficit.

Up until that point state spending had been mopping up recycled trade deficit dollars. Then the state spending stopped and the private sector lenders' interest rates dropped as a result. In addition the trade partners were flush with dollars and nowhere to invest them anymore, so they started to create huge demand for private sector investments, buying directly into everything.

US SPVs were buying debt off banks and selling them on as grade AAA investments. This resulted in pressure to deregulate further and pressure to create more debt, so the banks were selling debt like there was no tomorrow.

This process fed off itself. The US consumer was able to remortgage multiple times, and use the money to buy German cars, foreign oil, and everything else Made In China.

That resulted in the house price boom the culminated in the banking crisis as investors realised they had been sold dodgy securities by the USA.

The same situation in Europe was not possible because those SPVs for taking risk off banks and other debt creators were non-existant. In many countries it is not legal to sell on debt that involves a third party. So how come there was a housing boom?

I think there were a number of factors: the false returns generated by those CDOs that AngloSaxon banks were buying into, the contagion of ideas, the use of Credit Default Swaps (CDS)s as a method of turning debt assets into cash, and the recycling of surplus dollars via the European markets.

56. At 11:50pm on 16 Dec 2010, tFoth wrote:
‘ I do wonder whether, and almost hope that, the tuition fees issue galvanises young people to protest’:

Tuition fees, now that one really does get me mad.
I’ve got one at University (currently paying his fees), and two more that are likely to go.

So being the prudent sort, I’ve put money aside to pay their fees, based on the presumption that they were going to be £3,250 - £4,000 p.a.

So when I hear they’ve gone from £3,290.00 to £9,000.00 it does tend to wind me up a little. Inflationary increases one can try and budget for, but a 175% increase you can’t.

And the only thing I can currently think of, that winds me up more than that is being told by politicians that they’ll vote against increasing tuition fees, and then voting to increase by 175%.

What in God’s sweet mother earth is the point of bloody voting. You may as well mark your ‘X’ on the damn wheelie bin.

62. At 02:05am on 17 Dec 2010, BobRocket wrote:

The banks realised that they could repackage these performing packages into bigger packages and sell them on (that in all likelihood they were making up any shortfall in the performance of these packages will come out in the wash at some point in the future), no one had to worry as the packages were based on the underlying asset (which due to the rising market now had a greater value than when the original loan was given), the loans appeared to be performing and anyway they were sold with insurance. (what could go wrong ?)
------------------------------------------------------------------------
Bob, how's my ten quid doing!

Quite a good explanation but not the whole story, especially the bit above.

Some individuals were looking to expand what was on offer in financial markets. They created some new forms of tradeable paper, sold the idea to banks. Unfortunately some other, less innocent individuals, knew that (especially in the US) that some loans had been pushed on individuals in areas where the jobs market was uncertain without any credit record and without any really good knowledge of what responsibilty (debt) they had taken on.

These new trades were good ways of disguising the potential bad debts and passing them on. [Debt has always been traded, by the way, and quite respectably as a means of mitigating potential losses due to default.)

A bull market had developed and this 'paper' was part of it. More and more financial 'institutions' {please note the word: not necessarily banks (pay attention Faker Jacques)} got sucked into this market with the results we now know.

It then became more risky to stay out of the bull market than remain in and fuel it to ever greater levels.

re #62
In your final paras you blame commodities for the collapse. I think it might be more correct to be specific - job losses and high fuel prices in two or three areas of the US. The communities that were badly hit by food (other commodity prices) prior to, and during 2007 were outside the developed world. The developing world's problem did not cause the credit crunch as directly as events in the US and UK.

Ben you are so right. Working in schools recently I am overwhealmed by the lack of motivation and work ethic in approximately 70% of the kids. We as a society have come to take a high standard of living as a "given" in life. It isn't and because attitudes are a very large oil tanker when it comes to turning around we will have at least a generation of relative decline.

Unfortunately this relative decline will be severe and exasperated by the facts of large populations in the BRIC's competing with us successfully for scare and ever more rare and expensive resources such as oil, coal, gas, food, and metals.

Sage - IMHO the only thing that will turn the Brits around is hard times. That should help with the reboot and trim the fat of empire. To remember how lucky we are.

I didn't mean to say that all kids are lazy though. They understand that if they are from a working class background they are basically done for. As I say you can break through this but it's uncommon and so most kids don't see flesh and blood examples of this.

On the topic of oil tankers, I think a big problem is having a generation who are poorly educated. That means less good teachers tomorrow, which means the next generation are not well educated, ie positive feedback loop.

People shouldn't be down on the kids - nobody can make a bigger mess of Britain than the current generation did. And like all fools they still think they behaved fine, despite a weight of evidence to the contrary.

Ben I agree, the attitude of kids is what we have moulded and made them. I also agree that hard times are what is needed as necessity is the mother of all invention.

Education these days should be so easy, There is so much great material available via the internet such as texts and videos that self education to a very high standard is available to all who have access and inclination to look for it and put the time in. We have put the emphasis on "teaching quality" too much when all the kids really need is a good coach to keep their learning on track and heading in the right direction.

A revolution in teaching and learning is required and this must be driven by what we can afford and what works. Something that one learns and masters largely by oneself with oversight from an expert teacher is much more effective and builds true resourcefulness and competence in the student.

Why do we have an MOC chaired by a politically motivated and controlled Governor and including an ignorant yank?

The latter is so wrong in everything he says, you have to wonder what on earth drove anyone to employ him. They certainly can't have checked his CV!

The fact that he implies I and all intelligent people are ninnies for not agreeing with him seriously offends me. I demand his apology and instant resignation.

Mr Sentance is right, and always has been. Inflation must be tackled. Interest rates must rise. The short-term result may be some people having diffiuclty with mortgages (I paid 18% in the 1980's and managed - without complaining), but those with well-earned savings will have more cash. This they will spend and the economy will grow

This point could be expanded, but any right-thinking person will appreciate that this is the only way out of the mess.

Maybe Mr Sentance should replace the MPC!

greatBobFrance - are we in danger of splitting hairs? If Sentence were in charge, yes he would up rates, but perhaps to 1.5%. Sure that would be a step in the right direction, but would he go to 4% or beyond?

2. At 5:35pm on 16 Dec 2010, Dempster wrote:
Well all that inflation isn’t being generated by wages:

Retail price index (all items) RP02:
Jan 2009 210.1
Sept 2010 225.3
Price inflation = + 7.2%

For the average working Joe or Jane:
Jan 2009 Average weekly earnings = £444
Sept 2010 Average weekly earnings = £443
Increase = – 0.002%

So if it isn't wages what is it?
Could it be Mr King's QE:
Overall price level = (Amount of money x speed of transaction [usually but not always reasonably constant]) / (Supply of all available items to purchase)
...........
Most commodities are priced in dollars, and the dollar is going down the toilet thanks to helicopter Bens QE, and the fact that tyhe country is dorwning in a sea of debt. This will continue, and if the middle eastern countries stop using the dollar to sell oil, then I expect hyper inflation as everyone tries to offload there dollars. It is the increase in the price of commodities that is causing most of the inflation I reckon. Add in a little UK QE and this pushes up the prices even further. Right now investors are pumping there soon to be worthless money into all commodities because they know the will always be worth something whereas Fiat currencies will not.

13. At 7:52pm on 16 Dec 2010, Oblivion wrote:
Quoting Steve Keen verbatim:
The credit impulse
The fact that aggregate demand is the sum of GDP plus the change in debt means that the change in aggregate demand is the sum of the change in GDP plus the acceleration of debt. Just as the debt contribution to demand is highly correlated with the level of employment, the acceleration of debt—or the credit impulse, which is defined as the change in the change in debt divided by GDP (Michael Biggs et al., 2010)—is highly correlated with the change in employment.

In stark contrast to the assumption made by Bernanke and most neoclassical economists—that debt only has macroeconomic implications if the distribution of debt affects consumption (to cite a recent paper by Krugman, “It follows that the level of debt matters only if the distribution of that debt matters, if highly indebted players face different constraints from players with low debt”, Gauti B. Eggertsson and Paul Krugman, 2010, p. 3)—the sheer scale of debt, its rate of change, and whether it is accelerating or decelerating, have very significant impacts on the macroeconomy. If Bernanke, Krugman and other neoclassicals were correct, the correlations between the acceleration in debt and the change in unemployment should be insignificant.

Instead, the correlation is highly significant, large, persistent, and causal, since it leads changes in employment and GDP by about 3 months. The correlation during the Great Depression was -0.72; over the whole post-WWII period from 1955 the correlation was -0.59, and since 1990 it was -0.82 (see Figure 31).

from here:
https://www.debtdeflation.com/blogs/2010/11/30/competition-is-not-a-panacea-in-banking/

.........
steve keen, a voice of common sence in a world or moronic neo-classical economists. You need to broaden your reading Stephanie.

When will these idiots at the MPC and the BOE and govt and Whitehall get it through their heads that one interest rate, one inflation rate and one main GDP indicator is now totally inappropriate and inadeqaute as a main method od measurement/indicator ... to manage a modern complex economy like the UK.

What already have now ... is both problem medium and long term inflation AND deflation as expressed in a single inflation rate of approx 3%+ and rising ... as out of control because the BOE has very little if indeed any strategic input or control ... over UK trade ... particularly UK imports.

We already have inflation and deflation viz-a-viz the domestic and globalised sectors of the British economy? Inflation in the globalised sector can also increase the deflation in the domestic sectors of the Uk economy.

We now have both ... where they are most damaging to the Uk Economy ... costing the UK taxpayer tens of ? billions a year

Someone has to get a handle on 'trade' as that is the cause and effect of inflation ... interest rates ... unemployment ... borrowing ....deficits etc ... that is why Goondog Trillionaire made such a mess of the UK economy ... he did/does not understand strategy/trade as being a history (?) graduate

Put the horse before the cart ... this is what is never discussed when discussing inflation ... the all emabracing attempt to explain prices in a single RPI/ CPI number is ... inadequate ... when the figures themselves exclude e.g housing costs when students/immigration is probably adding 1-1.25% a year to UK housing costs in higher rentals and property shortages.

Until the govt start measuring inflation properly ... the discussion goes nowhere.

76. At 08:26am on 17 Dec 2010, Ben wrote:
Sage - IMHO the only thing that will turn the Brits around is hard times. That should help with the reboot and trim the fat of empire.
..............
Lets start triming the fat by starting with the rich elite that put us here in the first place then.

Re post #26

"At what point is faith lost in those ‘notes’ in our wallets and those figures printed on our bank statements?"

I feel a sure sign will be when Bank of England £100.00 notes come into circulation.

72. At 07:59am on 17 Dec 2010, Dempster wrote:

What in God’s sweet mother earth is the point of bloody voting. You may as well mark your ‘X’ on the damn wheelie bin.
..............

I have come to the conclusion that there is now no point in voting. All parties have made it clear that they are determined to maintain the status quo, keeping their masters, the bond holders, happy. That leaves us little choice but to protest and take civil action until they listen. The longer it takes them to listen the more violent the uprising will be. People will not accept austerity being forced on to them due to the mistakes of the rich. Its a class war, a issue that has been going on for 100s of years. The difference is that this time the educated working class (middle class) that are effected. And they are well educated and can see through the lies and spin. As each day passes it becomes clear that WOTW was right all along. We need to make sure our children understand and are adaptable to change because right now no one can predict how matters will unfold. I too have children, and this is the best thing we can do at this time. The only good sign is that some of the back benchers are getting nervous.

62. At 02:05am on 17 Dec 2010, BobRocket

A question based on #62

When the loans were packaged by the bank and sold on (i.e. still owning the loan but with no rights to the money) was there any conditions attached that the banks had to make minimum payments regardless of whether the debtor made a payment or not?

"the MPC has been wildly wrong in its forecasts of inflation over the past two years - it could easily be wrong about the next two years as well"

Perhaps economists don't realise that they should calibrate forecasts - in business this is a well known technique (- a simple calibration example, list all past forecasts that had a probability of 0.3, if they happened 30% of the time then your forecast probabilities are well calibrated, if not your forecast probabilities are not well calibrated). It seems that fancy models and supposed causal debate (jackanorying) takes precedence among the MPC members (from whichever viewpoint, background or country). If the Guvnr cannot justify the calibration of the MPC forecasts in his regular explanation letters (which is never done) then quite clearly the system is not up to scratch.

"I have come to the conclusion that there is now no point in voting. All parties have made it clear that they are determined to maintain the status quo"

I'm amazed you say this. The last government left us in a far worse situation relative to our peers than before they got in. Any talk of "the tories would have done the same" is speculation. This generation voted for pudding for all because "it's the right thing to do" without any inclination of how to pay for it. Now their kids will.

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69. At 07:48am on 17 Dec 2010, Up2snuff wrote:
re #64
We ran an average 3% inflation through Labour's time in Government. That was very high for the time, with what was happening in the world economy.

If you look at what we thought was high inflation - 1967 to 1995 - you will see spikes but not a consistent inflationary economy at a time when no negative inflation was on offer.
We have deliberately made our economy less competitive in the last thirteen years.
Mad. Crazy. Daft.

Hey! Let's be careful out there today.


"Deliberately made our economy less competitive in the last thirteen years?" Growth was higher from 1997-2008 that the major or Thatcher years.

As for your inflation comment,I suggest you look at the figures again,there was a surge in inflation after the Yom Kippur war and oil spike,1973-,I have a figure of 15.8% inflation for 1977,18% for 1980,7.8% for 1989,9.5% for 1990 and these figures are not untypical of the period you hold up as an exemplars of a low inflation economy.After 1997,inflation fluctuated from -o.5% in 2008,to 4.3% in 2007 at its peak with the average lower at 2.9%

So Hey! Here is a nice reference for you to find yourself some accurate figures for a change.

Historical UK Inflation And Price Conversion 15 Apr 2010 ... Cumulative historical UK inflation and price conversion using data from 1750 onwards.
safalra.com/other/historical-uk-inflation-price-conversion/ - Cached - Similar

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Mervyn King can look forward to a substantial (inflation) index-linked pension. So he isn't personally affected if inflation is nearly 5%, as now, or if it is 100% or 10000%; he can serenely view any figure as a purely theoretical concept that affects other people.

The only way to make King and the others take proper responsibility for control of inflation is if we paid them fixed incomes and pensions.

@36. Remantled wrote:

"I like it. I'll use that one if I may..."

I suggest you correct the spelling first though. It should be "practise" - unless you're an American.

Sorry to be fussy but I think we're more than americanised enough as it is. The spell-checker for this blog, for a start.

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Having read a multitude of posts these last few weeks, I cannot help but wonder, if it isn't time to discuss if our whole economic model is actually fit for purpose and, if not, what can replace it. We have been led to believe that the world economy can be based on continual economic growth. I'm no mathematician, but that leads to an exponential curve and to believe in that is utter folly.

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I read Mr Posaen's speech. What I did not find was an analysis of the effects of the starvation of credit on SMEs and the consequences to supply capacity. We know real wage reductions and part-time working are supporting corporate profit margins but where is the analysis of capacity shelved/lost due to lack of finance at affordable levels? You dont have to be in liquidation to evidence the point. You could be commercially alive, but only just...

The only issue is that the MPC are wandering into the political arena. They should and in fact do have quite a narrow remit and that is to ensure that inflation stays within a band. Now they have deferred from putting up interest rates up for some months now and we are bearing the consequences.

If the BoE are tasked with any other actions regarding the economy there should be a separate committee, yes they should consult with one another but each committee should be held responsible for their own remit. Lets face it if you had miss read the economy for so long would you be still in your position.

Dempster @ 72 : we're in exactly the same boat.

I too look on the libdem betrayal with little short of disgust. It is ironic that, had they not gone into the coalition they would, by now, be picking up disaffected tory votes and could begin to hope for a breakthrough at the next election (as they have at every election in the past). Now, it look as though they've save labour from a generation in opposition.

As for the gall of arguing that you can break a personal pledge because of a subsequent coalition agreement. It's beneath contempt - as the agreement was therefore a breach of the pledge.

On your last line, however, you ask what's the point of voting? The answer is illustrated by the degree to which pensioners the grey vote is courted by all parties while the young (who tend not to vote) tend to be ignored. Then, when they take to the streets, they are stigmatised via the media for the violence (which can only drive the wedge further in).

But don't give up on democracy. Without it the powers that be will continue to be: and we need a revolution whether through the ballot box or through the street.

For me, I'm pretty much a traditionalist and have nothing against the Royal Family, but the look on Charles and Camilla's faces is an icon of the disconect between the establishment and the young: and carries echoes of the French Revolution. And the strange thing is that I find this more exciting than worrying.

I don't know whether young people will be able to maintain the momentum behind their protests. But I note that the establishment may have inadvertently provoked a group that has nothing to lose.

88. At 10:08am on 17 Dec 2010, Ben wrote:
"I have come to the conclusion that there is now no point in voting. All parties have made it clear that they are determined to maintain the status quo"

I'm amazed you say this. The last government left us in a far worse situation relative to our peers than before they got in. Any talk of "the tories would have done the same" is speculation. This generation voted for pudding for all because "it's the right thing to do" without any inclination of how to pay for it. Now their kids will.

***********************

I'm amazed you say this. The Tories and their supporters are hell bent on blaming Brown and New Labour for everything.

Brown was highly regarded in the City and internationally for his economic competence and prudence for most of the New Labour era.

A few points.

1. New Labour inherited an NHS system suffering from years of neglect. Now satisfaction ratings have never been higher.

2. New Labour inherited a state education system suffering from years of neglect.

3. The credit crunch and meltdown necessitated state spending being raised to plug gaps left by the private sector. This Keynsian stimulus avoided the worst effects and explain the small GDP growth earlier this year.

I do off course take issue on the bank bailout - it should never have happenned. Moral hazard etc.

There seems almost a desperation by the Tories do deflect blame from where it really belongs, the banking sector and the rather feeble private sector.

The Tories and their disgraceful apologists, the LibDems, are using all of this as a smokescreen to cover the most ideological reduction in the state sector for generations.

Need I remind that the successful economies in Europe all have healthy state sectors c. 52% GDP with higher standards of living and satisfaction levels.

Boy George's experiment will end in tears.